Blogs

Securities Litigation for the Week of October 16, 2023

In a week marked by substantial regulatory activity, the Securities and Exchange Commission (SEC) initiated new enforcement actions, while concurrently issuing noteworthy rule amendments focused on short selling and beneficial ownership. This article offers a thorough analysis of the developments that unfolded during the week.

Regulatory Changes

Short Selling Rules

The SEC, on October 13, 2023, promulgated a new rule aimed at augmenting transparency in short selling activities. The newly adopted provisions require the collection and reporting of data on short sales, thereby facilitating greater scrutiny and regulatory oversight. This landmark rule change seeks to ensure that market participants are more informed and that market integrity is upheld.

Beneficial Ownership Rules

On the same day, the Commission introduced changes concerning rules on beneficial ownership. While the release provides few details, the overall thrust appears to be aimed at enhancing transparency and reporting requirements for beneficial owners of securities. These changes promise to furnish both regulators and investors with improved visibility into ownership structures.

SEC Enforcement Actions

For the week under review, the SEC filed no new civil injunctive actions but initiated two administrative proceedings. These actions are separate from any 'tag-along' actions or those which present a conflict of interest for this author.

Case Highlight: SEC v. Sharp

The SEC continues its prosecution in the case against Canadian citizen Frederick Sharp and other defendants for their roles in a series of pump-and-dump schemes involving four microcap issuers between 2011 and 2019. Frederick Sharp was identified as the principal orchestrator who disguised the identities of controlling shareholders while manipulating share prices. This manipulation yielded millions of dollars in illicit profits. Defendant Avtar Dhillon of California reached a settlement with the SEC, consenting to permanent injunctions under various sections of the Securities Act and the Exchange Act. Mr. Dhillon has agreed to a penny stock bar and will pay disgorgement of $9,143,548, along with prejudgment interest of $1,303,236. A parallel criminal case by the U.S. Attorney's Office for the District of Massachusetts will offset $1,493,500 of this sum.

Case Highlight: In the Matter of Collaborative Financial Consulting LLC

A limited liability company based in Beverly Hills, Collaborative Financial Consulting LLC, and its sole member, Jason Reynolds, were charged with conducting business as unregistered investment advisers. Mr. Reynolds, who previously held positions as a registered representative and investment adviser, falsified information in client agreements concerning his licensing status. As a result of these actions, Mr. Reynolds and his firm collected fees totaling at least $150,000 from eleven clients across multiple states. To resolve the matter, both have consented to cease-and-desist orders, and Mr. Reynolds has been essentially barred from the securities industry for three years, alongside a penalty payment of $20,000.

Case Highlight: In the Matter of Wilmington Investment Management, LLC

Wilmington Investment Management, a registered investment adviser since 1992, faced charges related to its wrap program offerings between February and August 2020. The firm was accused of avoiding transaction costs at the expense of its clients by investing in higher-cost mutual fund shares while failing to disclose its practices adequately. The SEC's order alleges violations of several Advisers Act sections, resulting in a settlement that includes disgorgement of $999,559, prejudgment interest of $77,588, and a penalty of $250,000.

Conclusion

This week saw the SEC engage robustly in both rulemaking and enforcement activities, highlighting its ongoing commitment to market transparency and integrity. Regulatory updates on short selling and beneficial ownership are expected to provide a more leveled playing field for investors, while enforcement actions underline the Commission's focus on maintaining stringent oversight and penalizing misconduct.